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Why are Fintech start-ups avoiding the core of banking?

In that same dialogue about when banks should act to block, buy or beat new competition, I realised that the new competition is doing something quite clever.  Unsurprisingly, Fintech firms look at banking and realise that it’s pretty dull and onerous stuff.  AML, KYC, compliance, audit, regulatory reporting, rules and oversight of business are the day-to-day core of what banks deal with.  A Fintech firm doesn’t want to deal with that!  So most are targeting things around the banking system, rather than the banking system itself. That’s why most are adding layers to the system to remove the pain of the past, rather than replacing the system itself.

If you look at Lending Club, Prosper, SoFi, Zopa, Square, Klarna, Stripe, Betterment, Wealthfront, Personal Capital, eToro, Zulu Trader and more, none of them have attacked the core deposit account marketplace.  That marketplace is the one that lives with all of the rules and regulations.  Instead they’ve targeted areas of finance where margin can be made through P2P platforms, whilst avoiding the regulatory overhead.  Admittedly, the regulators do wake up and step in.  In the case of P2P Lending, the US forced providers to use institutional capital – I2P rather than P2P – whilst the UK providers urged the regulator to create new rules appropriate to their markets .

We are now seeing this emerging in other areas such as payments, where lighter touch licensing occurs to enable new players to step in.  But even then I laughed out loud when I heard one bank say that the most likely battle over account access from third parties under PSD2, will be banks demanding access to other banks’ accounts.

In this new world of intense competition from Fintech in the traditional domains where banks made margin, whilst banks retain strength in core deposit accounts that are the lifeblood of cross-selling, what will the future cost-income model look like?  How will banks make money when everything is free?

Well, they will make money.  Goldman Sachs may forecast that 20% of the credit markets will move to P2P lending and crowdfunding over the next ten years, losing banks $12 billion in profits, but banks will still make money from deposit accounts.

UK banks generate around  £9 billion ($15 billion) a year in revenue from deposit accounts.  Then those accounts are used to cross-sell other services from loans to wealth management to mortgages to credit cards to savings and investments.  Take away the stickiness of the deposit account – most consumers don’t change their accounts, with 37% staying with the same bank for over twenty years – and then you really would have a market disruption.   Meantime, most are left with onerous markets that require capital reserves, high levels of governance, rules and regulations, that are incredibly off-putting for most.  In fact, the biggest barrier to entry in financial markets is regulation, and that’s why most banks see new competitors nibbling at their periphery but attacking the core?   Not yet.


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • I think the UK Challenger Bank market gives some interesting insights as to why ‘start-up’s are avoiding it. It’s exactly as you said it’s the costs complexity and headaches for dealing the complex regulatory environment to be a full ‘bank’. And when you can avoid it, why not. Recently launched challenger Bank in the UK Oaknorth just raised $100M USD (http://www.growthbusiness.co.uk/news-and-market-deals/mergers-and-acquisitions/2497031/sme-bank-oaknorth-secures-66m-investment-as-indiabulls-takes-40-stake.thtml). Good luck to most startups to be able to raise that kind of cash just right after launch and have the will and skill to take on the full governance, rules, regulations, and so on. It will be interesting to see how many startups end up becoming regulated banks down the road. That also played out in emerging countries with some microfinance organizations who started as NGOs, then got lending licenses and once they had scale became fully regulated.